The startling rise of 'pseudo universities'

November 28, 2003

For-profit universities are booming, gaining credibility and threatening some traditional institutions, says Stephen Phillips, while Olga Wojtas reports on initiatives by a new breed of Scottish university entrepreneurs

Peruse the research annals of any discipline in the US and, chances are, the latest findings or cutting-edge studies will have been conducted by the usual suspects - publicly funded or privately endowed non-profit universities. Turn your attention to the business press, however, and a different breed of higher education institution hogs the limelight.

The University of Phoenix, Sylvan Learning Systems, Kaplan, DeVry, Corinthian Colleges and Strayer Education are unlikely to figure in any pioneering academic inquiries any time soon. But they might find themselves fodder for a case study for budding entrepreneurs on MBA programmes.

Commercial higher education providers, dubbed "for-profits" or "proprietary" institutions, are the toast of Wall Street, confounding tepid business conditions with astronomical revenue growth and handsome returns for investors, and the US experience could provide food for thought for UK universities should the private sector gain a greater role in the country's higher education system.

Apollo Group, parent of the University of Phoenix, the largest player in the US, has a stock market valuation of $11.4 billion (£6.7 billion) - equal to the endowment fortune of Yale University, America's second-wealthiest college. Phoenix, whose non-descript campuses have become almost as ubiquitous across the US as the generic strip malls they typically occupy, has seen enrolment swell 163 per cent to 187,495 (straddling classroom-based courses and its separately floated online arm) since 1998.

Sylvan, Corinthian, DeVry and Strayer all report brisk student demand, while Kaplan has become a cash cow for the Washington Post Company's business empire. Having successfully parlayed its university entrance exam cramming service into a cross-country network of higher education franchises (aided by a prodigious acquisition spree), Kaplan turned over $621 million last year.

All told, enrolment at for-profits surged almost 48 per cent between 1996 and 2000, outstripping the traditional sector's 5.7 per cent growth.

Moreover, proprietary institutions have cornered 41 per cent of the online distance-learning market, according to education industry consultant Eduventures.

Business is booming amid the recession as people seek to brush up their skills to enhance employment prospects and earning power. For-profit bachelors and masters degree-granting institutions dispense with traditional overheads such as tenured faculty, residential campuses, research labs, libraries and strictly academic subjects, and instead borrow the no-frills formula of two-year vocational skills colleges, typically offering stripped-back courses in marketable disciplines redeemable for professional advancement and a fatter pay cheque.

Courses cater for mature students who tend to be poorly served by traditional institutions. They are taught by untenured faculty (often part-timers with day jobs) via the internet or through evening classes at local sites so staff can can juggle work, childcare and other commitments.

Among their chief selling points are convenience, flexibility and the ability to opt for accelerated study.

As well as cashing in on propitious economic conditions, proprietary institutions are tapping profound demographic and societal forces. Despite the increasing premium placed by employers on having an undergraduate degree, almost three-quarters of Americans over 25 lack one. Meanwhile, demand for transferable skills is spiralling as technology pervades the workplace. "We are moving to a certification-based society - there's great demand for getting a degree in addition to training," notes Sean Gallagher, senior analyst at Eduventures.

For-profits have also been enterprising in filling gaps in traditional education provision. Kaplan and Sylvan pitch remedial education services to community colleges keen to outsource the extra teaching needed to build up students' basic skills.

On the face of it, for-profits are hardly stepping on the toes of traditional institutions and, in some instances, they offer complementary services.

But observers in the US higher education establishment are far from sanguine. Many fear that commercial upstarts, by eating into non-profits'

income from lucrative courses such as business and education, threaten to undermine the traditional sector's ability to "carry" less economical courses, such as humanities, arts and pure sciences, and its ability to bankroll cutting-edge research.

Experts also fear that for-profits are helping to commodify higher education, debase the currency of qualifications and undermine the academy's charter to promote disinterested inquiry, cultivate citizens and perform social welfare functions.

Because for-profits draw virtually all their revenue from student tuition fees, they tend to cherry-pick those courses offering the highest number of students at the lowest price (in terms of equipment costs), notes Frank Newman, a public policy professor and director of the Futures Project on higher education at Brown University in Rhode Island. Intensified competition from commercial providers on money-spinning courses could damage the viability of traditional institutions, he fears.

"For-profits are building a base of students - traditional institutions that don't sense the danger aren't paying attention. The effects are being masked by (heady general demand for) higher education, but once the bulge of students has worked its way through, the effects will be severe - in ten years, everyone's going to wake up with a big headache."

Lower-rung colleges coveting the same mass market face the greatest threat, says Philip Altbach, professor of higher education at Boston College, Massachusetts.

Lara Coturier, director of research at Brown's Futures Project, says there is ample precedent from liberalised higher education markets around the world. "In South Africa, for-profits came in and picked off the most lucrative courses. Public institutions were left to fulfil the public-service courses such as medicine that society needs but are expensive to offer." Newman says that a similar situation in New Zealand left three public institutions - the Central Institute of Technology, Wairarapa Community Polytechnic and Wanganui Polytechnic - virtually insolvent and forced them to be consolidated into other public institutions.

Traditional institutions underestimate commercial providers at their peril, Newman adds, observing that Phoenix and its kin have already bridged a huge credibility gap. "Ten years ago, everyone would have said (Phoenix) was, if lucky, second class - more likely fifth class. But they've proven that they can do some things that even the best (non-profits) are not doing."

"One thing for-profits do very well is customer service," Newman concedes.

Gallagher agrees. "For-profits are focused on outcomes - what has the student learnt? What can they take away and bring back to their career and life?" he says.

Gallagher adds that the student demand for results ensures quality of academic standards. "People tend to think for-profits cut corners in the pursuit of profit, but institutions (would not) be successful unless they generated positive student outcomes and experience. For-profits couldn't be in business unless they delivered quality education."

That view is not shared by all accreditation bodies, many of which remain unconvinced about the quality of proprietary institutions. Although Phoenix has been praised by the North Central Association, which also accredits the likes of the University of Chicago and Northwestern University, the American Bar Association does not recognise law degrees from Sylvan's online Concord Law School, and no for-profit business school has been approved by the Association to Advance Collegiate Schools of Business.

The job of policing quality will only get tougher as the international market of private-sector education organisations grows, Coturier says. "The opportunity for students not to know how well vetted institutions are multiplies dramatically."

And it is the international market, specifically the developing world, that the commercial outfits have their eyes on. Unlike the US and the UK, where the school-leavers market has been largely sewn up by traditional universities, the market is wide open in developing countries. "Demand for post-secondary education far exceeds supply (driven) by the increased number of college-age people, the rise of a middle-class understanding of the returns on education and the increasing technological demands on the workforce," says Chris Symanoskie, communications director at Sylvan, which has assembled an international network of campuses focused on Latin America.

Sylvan, based in Baltimore, Maryland, is recruiting students straight from school in Chile, Mexico, Costa Rica and Panama, says Symanoskie, who emphasises that native administrators and instructors are used.

The spectre of multinational companies supplanting indigenous institutions in developing nations is disquieting to Altbach. "How are (these countries) going to maintain their intellectual autonomy?" he asks.

Echoing the debate on what constitutes a university that erupted in Britain recently when the government proposed conferring degree-granting powers on private businesses, Altbach dubs the growth of for-profits "the rise of the 'pseudo-university'".

"They are not universities, they are training operations. These places do an effective job in niche markets catering for intellectually narrow interests, but university should be a place of inquiry where a range of degrees is offered - teach(ing) students to ask questions," he says.

Call them what you will, though, Gallagher suspects that if Britain permits commercial providers to compete with the traditional sector, they will make a go of it in some form or other. "America has one of the best higher education systems in the world, but for-profits are prospering. In the UK, if there are certain industries where demand for skilled workers is not being met, for-profits have the potential to succeed."

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